Demand Learning Objectives Describe the law of demand

Demand

Learning Objectives Describe the law of demand Identify & describe the role of the substitution effect & the income effect Explain the relationship between a demand schedule & demand curve

Quantity Demanded The amount of a good that consumers are willing and able to purchase at a particular price NOT how much of a good you want Must be willing and able to buy that quantity

Quantity Demanded You love Twinkies You want 100 Twinkies cost $1 each You have $10 You also need to spend $5 on gas What is your quantity demanded of Twinkies?

Law of Demand Rise in Price = Fall in Quantity Demanded Fall in Price = Rise in Quantity Demanded Tendency for price & quantity demanded to move in opposite directions

As Price Goes Up… As Price Goes Down… Quantity Demanded Goes Up…

“All Else Equal” Changes in quantity demanded assume that all else remains equal Income, Your taste for a product, etc.

When Price Goes Up, Quantity Demanded Goes Down… Substitution Effect Tendency for customers to switch away from a good whose price has risen and towards other goods that have become relatively less expensive Income Effect Diminished purchasing power of your income; your money doesn’t “go as far”

Substitution Effect Tacos cost $1; Burritos cost $2 Opportunity cost of 1 burrito = 2 tacos Price of burritos goes up to $3 New opportunity cost of 1 burrito = 3 tacos Incentive to substitute tacos for burritos, because now you can get 3 tacos for every 1 burrito

Substitution Effect Rise in movie ticket prices Customers buy fewer tickets & rent more Blurays Rise in apple prices Customers buy fewer apples and buy more oranges

Income Effect Purchasing Power – Your ability to buy something; when prices increase, your ability to purchase products (purchasing power) decreases You make $100 per week You can buy 100 Twinkies per week at $1 each Price of Twinkies rises to $1. 25 Now, you can only buy 80 Twinkies per week

Income Effect When prices are low $100 buys more things Quantity Demanded goes up When prices are high $100 buys fewer things Quantity Demanded goes down

Demand Schedule Price (Dollars/Gallon) Quantity of Gas Demanded (Gallons) $2. 00 20 $2. 50 $3. 00 $3. 50 $4. 00 15 10 5 0

Demand Curve Graphical representation of the Demand Schedule 4, 50 Price 4, 00 (Dollars/ 3, 50 Gallon) 3, 00 2, 50 2, 00 1, 50 1, 00 0, 50 0, 00 0 5 10 15 Quantity of Gas Demanded (Gallons) 20

Demand Curve Change in quantity demanded due to a change in price is called a movement along the demand curve

Demand Curve Graphical representation of the Demand Schedule 4, 50 Price 4, 00 (Dollars/ 3, 50 Gallon) 3, 00 2, 50 2, 00 1, 50 1, 00 0, 50 0, 00 0 5 10 15 Quantity of Gas Demanded (Gallons) 20

Market Demand Curve Graphical representation of the quantity of a good demanded by ALL consumers in the market at each price

Price (Dollars/Gallon) Tom’s Demand Fred’s Demand Market Demand $2. 00 20 30 50 $2. 50 15 25 40 $3. 00 5 15 20 $3. 50 0 10 10 4, 50 4, 00 3, 50 Price (Dollars/ Gallon) 3, 00 2, 50 Dmarket 2, 00 1, 50 1, 00 0, 50 0, 00 10 20 30 40 50 Quantity of Gas Demanded (Gallons)